It is possible for people with substantial assets to plan their estates to minimize or even eliminate estate taxes. Such planning is particularly important for business and farm owners who want to pass the business to family members because estate taxes could cripple or destroy the business and leave little or nothing for heirs.
Every situation is different, and each requires careful analysis to determine the best way to accomplish the goal of reducing or avoiding estate taxes. Scott Law Firm provides estate-planning services in this area and also recommends consultation with a tax accountant.
A common misconception is that people seeking to minimize or eliminate estate taxes must have a trust rather than a will. Actually, this goal can be accomplished through either a will or a trust, although if done by will it will usually involve creation of one or more trusts in the will.
An important point to understand about estate taxes is that they are based on all money or property passing to any person as a result of the taxpayer’s death. Therefore, certain assets are subject to estate taxes whether or not they pass through any probate process. Examples are life insurance proceeds and interests in jointly owned property which pass automatically to a survivor. Therefore, for the purposes of this discussion, the term “estate” refers to all property passing as a result of person’s death, whether or not the property would be subject to probate.
For many years, there was a $600,000 exemption from the federal estate tax, meaning that an estate of $600,000 or less was not subject to the tax. The exemption amounts began increasing in 1998 under the Taxpayer Relief Act of 1997.
The exemption amount in 2023 is $12,920,000 for an individual or $25,840,000 for a married couple. The exemption is indexed to inflation, so it will increase annually. However, the exemption is scheduled to be cut in half in 2026 unless Congress changes the law again.
The primary technique for eliminating or minimizing estate tax is to take advantage of both the exemption mentioned above and a 100% marital exemption from the estate tax applicable to all property passing to a surviving spouse. Thus, for example, either a will or trust can allocate assets covered by the estate tax exemption to persons other than the surviving spouse, with the surviving spouse receiving the remainder of the assets. This can entirely eliminate estate taxes upon the death of the first spouse to die. Depending on how soon the second spouse dies, however, it may not be possible to totally eliminate estate taxes upon the death of other spouse.
Another technique to eliminate or reduce estate taxes is to make lifetime gifts of property to children or other persons. For example, in 2023, an individual may give up to $17,000 apiece per year to as many people as he or she chooses without owing gift tax, and a married couple may give up to $34,000 apiece per year to as many people as they choose without owing gift tax.
Obviously, a gift program of this nature, if continuously pursued, will have the effect of reducing the amount in a person’s estate at the time of his or her death, with consequent elimination or reduction of estate taxes.
However, there is also a lifetime gift tax exemption that must be considered. Gifts made during a person’s lifetime that exceed the exemption are subject to gift tax even if the annual gift limit is not exceeded. In 2023, the lifetime gift tax exemption increased to $12.92 million, which means $25.84 million for married couples. However, this exemption is set to decrease to $6.4 million per person in 2026 unless Congress decides otherwise.
If federal estate taxes are owed, the marginal tax rates range from 18% to 40%.
Missouri no longer levies an estate tax. When it did impose an estate tax in the past, the tax was tied to the federal estate tax.
All inherited property receives a “stepped-up basis” equal to the fair market value of the property at the time of death of the person from whom the property was inherited. Thus, if an heir then sold the property, capital gains tax is owed only on the excess of the sale price over the stepped-up basis.
This has been a very brief overview of some of the issues involved in planning for estate taxes. The specific recommendations in any individual’s or couple’s case will depend on a complete assessment of assets and goals, and consultation with a tax accountant is recommended.
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